I don't break news, I fix it.

Post navigation

What, Nothing’s Wrong Here …

Another day, another bank in trouble. It might be easy to do little more than roll your eyes at the news that Standard Chartered of the UK is caught in a scandal, except this one is very different for many reasons. To start with, the allegation is that they were the launderer in chief for the nation of Iran over a period of at least a decade, helping them hide $250B in money transfers around sanctions. This is also one of the largest banks in the world, with total assets around $600B and operations around the globe.

But where this gets especially interesting is through the still developing role of the firm Deloitte & Touche. They are one of the “Big Four” auditing firms that has been in the crosshairs of a large number of people convinced that the lack of truly independent assessment is one of the main problems in the teetering financial industry. This scandal, different as it is, could be the one that coalesces a diverse group of detractors into a movement – even though auditing had very little to do with it directly.

The main scandal is the latest to rock the UK financial world, aka “The City”. Standard Chartered is a huge bank that was set up in Victoria’s reign to serve the overseas empire, and their current reputation matches their august origins. They are one of the great glues that hold the developing world to the developed, operating through former colonies India and South Africa primarily. That they became involved with Iran is not at all unexpected.

The allegation is that Standard Chartered severely under-reported their legal dealings with Iran and strayed into areas that are illegal under US law. They first got into trouble for this in 2004, and promptly asked Deloitte & Touche to prepare a report on what was going on. In 2007 they used this report to prove that Standard Chartered was indeed a clean bank and not a money launderer.

That’s the unique angle on this scandal, still developing.

The report that gave Standard Chartered a clean bill of health was written by the financial services arm of Deloitte, separate from the auditing branch. This has always been an important distinction that is key to both why there is suspicion foisted on the auditing firms and how they have avoided close scrutiny. Auditing is not very profitable, but management and related contract gigs can be. Nearly all big financial firms maintain a cozy relationship with their auditors – but with the different branch that everyone claims is distinct and not influential on the audit of the company’s books. Many people have long smelled a rat, but their suspicions were deflected by the supposed wall between the two parts of the auditing firms.

In this scandal, the potential plaintiffs are not disaffected shareholders who claim a bad audit was misleading but New York regulators claiming a violation of law. And the arm of Deloitte that is being accused along with the Standard Chartered is the services arm, the part that has always remained above the fray.

In an email obtained in the course of the investigation, a Deloitte partner said “We agreed” to the request to leave things out of the 2004 report because “this is too much and too politically sensitive for both Standard Chartered Bank and Deloitte. That is why I drafted the watered-down version.” In other words, they knew there was trouble and deliberately did not report it. That’s a smoking gun.

Where does this go from here? If nothing else, this scandal comes on the heels of a number of scandals at the UK’s largest banks that has pretty much destroyed any trust in them. Where everyone knew that JP Morgan had a lot in common with Henry Morgan, the pirate, British banks were supposed to be reliable and above the fray. Where it gets interesting is when Deloitte is sucked into this in a way that goes completely around their excuse for whitewashing and watering down audits that could have shown financial firms were capricious and generally behaving badly in ways that increased their exposure and risk to levels many investors would find unacceptable.

Without the usual trick to fall back on, Deloitte is bound to twist in the wind over this. How their many detractors make this into the opportunity to go after the whole auditing process and reputation of auditors is the part that is still developing. You can expect a lot more on this as they gather forces and start attacking.

The first hearing in New York is on August 15th, and we can expect more juicy details around then and in the weeks following as financial reporters dig into the story. Make popcorn.

It really is another day another scandal. How many more will there be? The auditors are totally complicit in this mess and it is way past time to take them on. There is no such thing as an ‘independent audit’ when the company being audited is paying the bill. You can’t tell me that they aren’t influenced by this especially when there are ‘other services’ being offered. I don’t care if the two arms of the auditing firm are supposed to be separate, people move between them all the time and they all know what is going on. It is totally dirty and the only surprise is that it has gone on as long as it has.
You included the link to MF Global, that is the best example of this problem. They had a clean audit with NO findings at all just months before they collapsed! You can’t tell me that their problems weren’t brewing back then especially in the confusion between accounts including customers. That should have been red flagged immediately.
No one should trust an audit, period, until the system is cleaned up. I am not one for government taking things over but this is one area that really should be taken out of the private sector all together. What we have now is worse than nothing because it gives the appearance of good health when there is no reason to believe any of it.

Excellent blog as always. I had heard of this but did not understand the issue beyond Iran. This is a great article with plenty of background.
Some day we will have the straw that breaks the camel’s back and there will be change. This can’t go on forever.